Competitive Bundling and Offer Design in a Symmetric Bertrand Duopoly

How should digital service firms design and bundle their offering to capture a large market while seeking differentiation from competition? To answer this question, we consider the most generic model of competition, namely, two symmetric firms competing on price with regard to two (independent or complementary) components with an arbitrary distribution of valuations, without restrictions on their product offering. We show that three outcomes emerge in equilibrium, namely, a full-mixed bundling monopoly, a full-mixed bundling competitive duopoly leading to a price war, and a pure or partial-mixed bundling differentiated duopoly yielding positive profits for both firms. The latter equilibrium is the most plausible because it is the only one that is both trembling-hand perfect and not payoff dominated. We demonstrate the benefits of bundling under competition, thereby explaining the online platforms’ motivation for and success in expanding their offering horizontally. Yet not all products may be offered in equilibrium to avoid direct or indirect competition; hence, competition may lead to a narrower range of products available than a monopoly. Is bundling anticompetitive? It is a double-edged sword. On the one hand, it softens price competition by allowing firms to differentiate their offering. On the other hand, it stimulates competition by creating some product overlap.